Belgium pledges tougher regime to boost ailing euro

Date: 02/11/00

By Tim Jones

BELGIAN Finance Minister Didier Reynders will try to impose stricter budgetary discipline on euro-zone members when he chairs the group next year, in an effort to bolster market confidence in the ailing currency.

Senior monetary officials say that under his plans, fellow ministers would be locked into long-term targets for keeping deficits under control before their annual spending proposals were submitted to national parliaments for approval.

Scrutiny of governments' programmes would also be speeded up to ensure that warnings about any possible slippage from longer-term targets could be heeded and policy errors corrected early.

The move is aimed at answering critics who argue that fiscal coordination in the single currency area is inadequate.

But it has already run into opposition from some member states reluctant to have their hands tied and is likely to provoke anger among national MPs whose powers to vote through extra spending would be effectively constrained by the EU.

The perception that economic policy-making in the single currency area is chaotic is seen as one of the key reasons for the collapse of the euro, which this week fell to a new low of 82 US cents - 28% below its launch rate in January 1999. This has been fuelled by fears that French, German and Italian tax cuts in 2001 will stimulate demand at a time when the euro-zone economy is already on an upswing.

In an effort to allay such concerns, Reynders wants to strengthen the rules to ensure governments submit updated three-year budget plans (stability programmes) for EU approval before their annual spending proposals go through parliament.

Until now, member states have often submitted their programmes late and the Commission has preferred to wait for annual budgets to be approved to distinguish between good intentions and real policy decisions. But Reynders argues that his proposals would provide a disciplined backdrop for the budgeting process and ensure better coordination of fiscal policy across the bloc.

Supporters say parliamentary opposition could be overcome by routinely allowing MPs to hold detailed debates on the updated programme before it is submitted. "This would have the added advantage of tying parliaments as well as executives into the commitments in the programmes," explained one official.

Under the Belgian minister's plan, the current four-month time lag between approving the first and last of the 12 euro-zone governments' three-year budget plans would also be shortened to ensure the 'early warning system' designed to alert member states to possible policy errors works effectively.

When Reynders first floated his ideas at a finance ministers' meeting in Versailles in September, several treasury chiefs were reluctant to agree to anything which would further restrict their room for manoeuvre while the threat of an oil-price-led economic slowdown loomed. "Of course, that was precisely the point of the proposal," said one senior official.

But the idea has won support from the European Parliament's fiscal-policy monitors, who were scathing in their criticism of this year's round of stability programme approvals and argue that it highlighted deficiencies in the current system.

Ministers found that the Dutch, Austrian and Portuguese programmes provided an insufficient "safety margin" for keeping deficits below 3% of gross domestic product in case of a major slowdown. The French, Germans and Italians were criticised for failing to hit over-modest targets, while Spain and Finland were urged to take extra measures to cope with their impending pensions time-bomb.

Because several programmes were handed in late, they had to be approved in four blocks between January and May. Most governments were censured for over-optimistic growth forecasts and fuzzy plans for curbing public spending to meet deficit targets, but the warnings were delivered too late to make any difference to this year's plans.

Belgian Finance Minister Didier Reynders will try to impose stricter budgetary discipline on euro-zone members when he chairs the group in 2001, in an effort to bolster market confidence in the ailing currency.